U.S. economy improving faster than expected, data show

Economists say growth appears to be accelerating after a slow and bumpy recovery from the Great Recession. But government spending cuts may slow momentum.

March 14, 2013|By Don Lee and Naomi Nix, Tribune Newspapers

Julie Horowitz Jackson, owner of a Bucktown gift shop called Virtu, has seen evidence of an increase in U.S. consumer spending reported Thursday. (Abel Uribe, Chicago Tribune)

The Bucktown shop owner listened as her customer debated whether she could afford the $860 blue topaz ring, set in 18-karat gold and sterling silver.

"She was like, 'I just don't know what my situation is going to be next year. I keep hearing all of these reports. I can't make that commitment right now,'" recalled the shop owner, Julie Horowitz Jackson.

That was December.

A month later, apparently reassured, the woman returned and bought it.

"My customers ... are getting more assignments, more clientele," said Horowitz Jackson, who owns Virtu, 2034 N. Damen Ave. "I do think it's a year for growth."

Piece by piece, evidence has begun to accumulate that after four years, the economy is on track for stronger growth than many had expected — bolstering the confidence of businesses as well as consumers.

The latest support for that view comes from data on consumer spending, which grew at a surprisingly quick pace in February, pushed up by demand for cars and building materials.

The report from the Commerce Department came after employment figures showed faster improvement than most economists had projected, in large part because of the rebound of the housing market.

To cap it off, on Thursday a measure of first-time unemployment claims fell to a five-year low.

The good news about jobs sent the Dow Jones industrial average to another record high Thursday. The Dow extended its winning streak to 10 days, a run of gains not seen since 1996.

"We are further along the recovery process than many people realize," said Wells Fargo Securities economist Mark Vitner.

The Great Recession of 2007-08, the steepest downturn since the 1930s, has been followed by a slow and bumpy recovery.

The more optimistic economists have forecast that the economy would begin to accelerate once consumers and companies worked through the damage left behind by the housing bubble and debt crisis that triggered the recession. That process of "de-leveraging" has now largely run its course, and the new evidence may suggest faster growth.

"What's changed in the economy is that the key cyclical drivers of economic growth are kicking in," Vitner said, noting the gains in the auto and housing markets.

Count John Rushing, 61, of Ben Franklin Motors in the North Side's Edgewater neighborhood, among the business owners and managers who say they're seeing a rebound.

In 2010, the general manager had to let a part-time employee go as sales stagnated.

"People would want to repair their cars during that period and not make a move into another vehicle," he said.

But lately, things seem to be turning around, with sales ticking up. Rushing hopes he can rehire a part-time worker in the summer to prep cars for sale.

"It's a funny thing — it's a wave that happens to the economy," Rushing said. "People are tired of not having things for a while and they buy."

Some economists remain cautious about the sticking power of the recovery, fearing that reductions in spending by the federal government, which began to take effect this month, will slow the economy.

The key question, said Kathy Bostjancic, an economist at The Conference Board, "is whether the momentum from the housing market" can "offset the negative drag from budget cuts."

So far, consumer spending, which accounts for about 70 percent of U.S. economic activity, has proved very resilient.

The 1.1 percent jump in retail sales last month from January was the most in five months and double analysts' expectations. Sales surged at car dealerships, home-improvement stores and Internet retailers.

"The fact that consumer spending hasn't slowed yet is definitely good news," said Ben Herzon, an economist at the forecasting firm Macroeconomic Advisers.

Americans are spending more for a variety of reasons.

Economists pointed to a possible surge in income tax refunds and support from the underground cash economy, which tends to flourish during hard economic times.

The sales of homes and cars have been given a lift by pent-up demand, superlow interest rates and some easing of credit by lenders.

"Consumers have refinanced, defaulted or restructured mortgage debt and paid down installment debt," said Daniel Meckstroth, chief economist at Manufacturers Alliance for Productivity and Innovation. "Households have the capacity to use more credit, and loans are available for creditworthy households."

Americans also feel more confident about their pocketbooks: Stock prices have soared, and home prices have finally begun to climb across the country.

When consumers feel wealthier, they tend to spend more, and in recent months, consumer wealth has increased. Mark Zandi, chief economist at Moody's Analytics, estimated that total household net worth — assets minus debts — climbed $16.6 trillion, to a record high at the end of February.

Most analysts see employers pulling back somewhat as the economy absorbs government spending cuts. The big question mark involves how much.

The economy also must absorb the effects of higher payroll taxes for workers and a bigger tax bite for wealthy individuals.

Zandi and some other economists estimate that the combination will shave about 1.5 percentage points from economic growth this year. But that will not come close to derailing the recovery, they said.

"The private sector of the economy is in very good shape, steadily improving, month by month, quarter after quarter," Zandi said.